Ben Shaw, co-founder and CEO of Vets First Choice

Vets First Choice, one of Maine’s most successful startups of the past decade, on Monday morning announced a merger deal that, if completed, is expected to create Maine’s newest—and largest, by revenue—publicly traded company.

The Portland-based animal health company founded in 2010 will merge with the animal health division of Henry Schein Inc., a Fortune 500 company with $12.5 billion in 2017 revenue. Henry Schein Inc. trades on the Nasdaq under the HSIC ticker symbol.

The plan is for Henry Schein to spin off Henry Schein Animal Health, which alone posted $3.5 billion in 2017 revenue, employs 4,300 people and counts veterinarian practices around the globe as customers. The newly formed spin-off company, which retains its public status, will then immediately merge with Vets First Choice, which employs 750 in the United States, with the majority based in Portland, according to a news release.

The newly formed publicly traded company will be headquartered in Portland and be called Vets First Corp.

Ben Shaw, Vets First Choice’s co-founder and CEO, will become CEO of the new company, while his father David Shaw, who he co-founded the company with and who serves as Vets First Choice’s chairman of the board, will serve as chairman of Vets First Corp. David Shaw is also founder of Idexx, Maine’s largest publicly traded company.

With estimated annual revenue of $3.6 billion, Vets First Corp. would become the largest publicly traded company in Maine, by revenue, surpassing Idexx Laboratories, which posted nearly $2 billion in revenue in 2017.

Interestingly, this merger deal could trigger further M&A activity that could lead to Vets First Corp. entering into direct competition with Idexx, predicted one Wall Street analyst (Mark Massaro of Cannacord Genuity). This is assuming that Vets First Corp., which will provide a comprehensive suite of services to veterinary practices, makes a strategic acquisition that allows it to also offer diagnostic services to veterinarian practices, which is Idexx’s business.

This complex merger transaction (more on the structure below) provides Vets First Choice with a path to becoming publicly traded while avoiding the time consuming and costly process of going public via an initial public offering,  a goal of the company’s that I have speculated about in the past.

“We are early in the lifecycle of rapid technological change in the animal health market,” Shaw said in the release. “This merger creates an enhanced value chain that connects the veterinarian, the manufacturer, and the pet owner through insights and analytics that will support better clinical and financial outcomes. This new global animal health care company is focused on improving clinical compliance by facilitating the delivery of care how, when, and where the pet owner wants it.”

The players

Vets First Choice, founded in 2010, provides technology solutions and back-end pharmacy services to veterinary practices throughout the country. It has approximately 750 team members in the United States, with the majority based in Portland, and more than 5,100 veterinary practices on its prescription management platform. It posted $83.3 million in revenue in 2016, according to its application for inclusion on the Inc. 5,000 list.

The company last year raised $223 million from new and existing investors, which it said at the time would be used to fund an expansion into Europe and Asia. It also learned earlier this year that it would receive $9 million from the state to build new corporate facility in Portland. Those funds came from the Maine Technology Asset Fund 2.0, which contained the $45 million in proceeds from the R&D bond sale approved by voters last year.

Henry Schein Inc. is headquartered in Melville, N.Y. It currently has operations or affiliates in 34 countries and its sales reached a record $12.5 billion in 2017, and have grown at a compound annual rate of approximately 15 percent since the company became publicly traded in 1995.

The division it’s spinning off to merge with Vets First Choice is called Henry Schein Animal Health and has “market-leading positions” in North America, where it counts approximately 75% of veterinarians as “active customers,” and in Europe and Australia/New Zealand, where it has roughly 70% of veterinarians as customers, according to a news release. Henry Schein Animal Health also has a software platform that it claims more than 50% of veterinarian offices in the United States use to manage their office and customer engagement.

Details of the merger

The deal is structured as a “Reverse Morris Trust” transaction, which is a potentially tax-free way for a company (in this case, Henry Schein) to spin off a subsidiary and merge it with another (usually smaller) company (in this case, Vets First Choice).

Upon completion of the usual regulatory approvals, Henry Schein will spin off its animal health division, Henry Schein Animal Health, which will then immediately combine with Vets First Choice to form a new publicly traded company. 

Shares of the new company will be distributed to existing Henry Schein and Vets First Choice stockholders, with the majority (an estimated 63%) going to Henry Schein shareholders, according to the release. However, exact ownership percentages are subject to change as the deal moves through the regulatory and deal-making processes.

Equity incentives held by Vets First Choice employees will be converted into equity incentives in respect of shares of Vets First Corp., according to the release.

The transaction has already been unanimously approved by the boards of directors of both Henry Schein and Vets First Choice, and is expected to close by the end of 2018.